Study: No Reason to Pay Realtor Commissions When Selling a House

There’s an assumption that the 6% typically paid in realtor commissions on a home sale is worth it because the seller will command a higher price than if he’d gone the “for sale by owner” route. But a trio of academics who researched years of home sales says that this assumption is false. In fact, they discovered that owner sellers got higher sales prices than owners who involved—and paid a commission to—real estate agents.

One of the researchers, Aviv Nevo, a marketing professor at the Kellogg School of Management, econ professor at Northwestern, offers this main eye-opening conclusion:

“Our key finding is that Realtors do not offset the cost of their commission; they do not get you a higher price.”

Their findings, summed up at the Kellogg Insight website, are based on a close look at home sales from 1998 to 2004 in one market: Madison, Wisconsin. Researchers compared sales involving realtors (who presumably received commissions) to sales from owner sellers who paid a flat $150 for an online listing. Here’s what they found:

With full access to data from both platforms, Nevo and his colleagues found that their raw data confirmed that owner sellers achieved higher prices for their homes. The average premium was 11 percent, or $14,800. That’s on top of the funds that sellers who used Realtors lost in the form of a commission.

How could this be? Shouldn’t a real estate pro be able to attract higher bids than a novice owner seller? Well, in theory, yes, absolutely. One reason that owner sellers command higher prices is that the people willing to skip the realtors and sell their own homes are probably better sellers—with more knowledge of the market, more patience, and tougher negotiating skills—than homeowners who are happy to unload these responsibilities onto a real estate agent, even if they must pay for the privilege.

Nevo admits as much:

“One idea is that people who use this for-sale-by-owner platform are the ones who are more patient,” says Nevo.

What does this mean for prospective sellers and buyers? Well, there’s an argument to be made that if you’re patient and knowledgeable, and if you’re willing to deal with the hassles of hosting open houses and showing the place off regularly to would-be buyers, you’ll end up with more money—potentially a lot more money—in your pocket by skipping the realtor and utilizing the “for sale by owner” method.

Buyers, on the other hand, might actually want to skew their search and seek out more listings from realtors than owner sellers. Why? You’d think that with the realtor commissions off the table and no middleman fee involved, there would be a better chance of getting a deal, right? Perhaps. But the study indicates that, odds are, owner sellers really know what they’re doing. They’re patient, they’re smart, and it seems as if they’re unlikely to accept anything approaching a lowball bid:

While Nevo and his colleagues studied home prices from the perspective of sellers, their results are also relevant to buyers. Their work suggests that buyers who want to save money on a home might actually be better off going to a Realtor because those selling through a Realtor are likely to be less patient and / or less confident in their ability to negotiate the price of a home.

In other words, when a pro is involved, you’re probably dealing with an amateur home seller—which is exactly what an experienced, savvy buyer wants.